How to Set Up Subcontracting & Job-Work in ERPNext (2026)

Job-work is everywhere in Indian manufacturing — machining, plating, heat treatment, printing, stitching, grinding. Getting it right in ERPNext means two things at once: the physical flow of material to and from the vendor, and the GST paperwork that makes it legal — the Rule 55 challan, ITC-04, and the one-year return rule.

Subcontracting fails in ERP when teams track only the material and forget the compliance, or track the compliance in spreadsheets separate from stock. ERPNext does both in one flow, which is the whole point of doing it properly. I am Manoj, an ERPNext and Frappe implementation consultant at MithTech in Bengaluru, and I configure these flows for Indian manufacturers.

How do I set up subcontracting in ERPNext?

You set up subcontracting in ERPNext by enabling it in Manufacturing Settings, marking the finished item as sub-contracted with a BOM, adding the job-worker as a supplier, and then running the Subcontracting Order flow. The order defines the finished item, the raw materials to supply, and the conversion service, so ERPNext knows what to issue and what to expect back.

Here is the setup and flow I use on a client system.

1. Enable subcontracting in Manufacturing Settings and create the job-worker as a Supplier.
2. Define the BOM for the finished or semi-finished item, listing the raw materials the job-worker will consume.
3. Create a Subcontracting Order for the finished item and the service charge, selecting the raw materials to supply.
4. Issue raw material on a delivery challan to the job-worker — book value, GST nil, Rule 55 format.
5. Record a Subcontracting Receipt when finished goods return, backflushing the consumed raw material and posting the conversion charge.

Skimmable summary: Set up subcontracting by enabling it, marking the item sub-contracted with a BOM, adding the job-worker as a supplier, then running Subcontracting Order → material challan → Subcontracting Receipt. ERPNext handles material, cost, and returns in one flow.

How does GST job-work work in ERPNext?

In ERPNext, goods sent to a job-worker move on a delivery challan that carries only book value with GST shown as nil, because sending material for job-work is not treated as a supply under GST. The taxable event is the job-worker's conversion charge, which comes back as a purchase invoice when the finished goods return. ERPNext links the challan, the receipt, and the charge so the trail is complete.

The delivery challan follows Rule 55 with the prescribed fields, and an e-way bill is required when the consignment value exceeds ₹50,000. The job-worker's conversion-charges invoice on return is where GST is actually charged and input credit is claimed. This split — nil-GST movement, taxable service on return — is the core of compliant job-work. For the wider GST setup, see my GST e-invoicing in ERPNext guide.

Skimmable summary: Material goes out on a nil-GST Rule 55 delivery challan (job-work is not a supply); GST applies only to the job-worker's conversion charge on return. ERPNext links challan, receipt, and charge, and an e-way bill is needed above ₹50,000.

What is ITC-04 and how does ERPNext help?

ITC-04 is the GST return that reports goods sent to and received from job-workers, and ERPNext helps by capturing the challans, receipts, and returns needed to compile it. Every movement of inputs, semi-finished, or capital goods to a job-worker must be reported, and ERPNext's subcontracting transactions provide the source data for the return's tables.

Filing frequency depends on turnover: ITC-04 is due quarterly for principals with turnover above ₹5 crore and half-yearly (25 October and 25 April) for everyone else. Because ERPNext records each Subcontracting Order, material challan, and Subcontracting Receipt with dates and quantities, the data for ITC-04 lives in the system rather than in a spreadsheet — which is exactly what you want at audit time.

Skimmable summary: ITC-04 reports goods sent to and returned from job-workers; ERPNext's challans, receipts, and returns supply the data. It is filed quarterly above ₹5 crore turnover and half-yearly otherwise, with the source records held in the system.

How do I track material returns and the one-year rule?

You track job-work material returns in ERPNext against the original Subcontracting Order, which shows what was issued versus what has come back, so pending material is always visible. This matters because inputs sent for job-work must return within one year — and capital goods within three years — or the movement becomes a deemed supply, attracting GST plus interest from the original send date.

Set up a report or dashboard on outstanding job-work material by age, so nothing quietly crosses the one-year line. ERPNext's Subcontract Returns handle finished goods that go back to the supplier and feed ITC-04 Table 4. Watching the ageing of issued material is the single most important control in a compliant job-work operation.

Skimmable summary: Track returns against the Subcontracting Order to see issued-versus-returned material, and age it so inputs return within one year (capital goods three years) — past that it is a deemed supply with GST and interest. Subcontract Returns feed ITC-04.

Frequently asked questions

How do I set up subcontracting in ERPNext?

Enable subcontracting in Manufacturing Settings, create the job-worker as a supplier, define a BOM for the finished item listing the raw materials, then run a Subcontracting Order. Issue raw material on a delivery challan, and record a Subcontracting Receipt when finished goods return — ERPNext backflushes the consumed material and posts the conversion charge. This keeps material, cost, and compliance in one flow.

Is GST charged when I send goods for job-work in ERPNext?

No. Sending goods to a job-worker is not a supply under GST, so the delivery challan carries only book value with GST shown as nil. GST applies to the job-worker's conversion charge, which returns as a purchase invoice with the finished goods. ERPNext records both the nil-GST challan and the taxable conversion charge, keeping the trail complete.

Does ERPNext support ITC-04 reporting?

Yes. ERPNext captures the Subcontracting Orders, delivery challans, and Subcontracting Receipts that ITC-04 requires, and its Subcontract Returns feed the return's tables. ITC-04 is due quarterly for turnover above ₹5 crore and half-yearly otherwise. Because the source data lives in ERPNext with dates and quantities, compiling the return is far easier than reconstructing it from spreadsheets.

What happens if job-work material does not return in a year?

If inputs sent for job-work do not return within one year — or capital goods within three years — the movement is treated as a deemed supply, and GST plus interest becomes payable from the original send date. In ERPNext, track outstanding material against the Subcontracting Order and age it, so you can bring material back or account for it before it crosses the limit.

Can ERPNext handle multi-stage job-work between vendors?

Yes, with configuration. ERPNext can model material moving through more than one job-worker by chaining subcontracting transactions, though multi-stage flows need careful setup of BOMs, warehouses, and challans. For complex machining or finishing chains common in engineering manufacturing, a partner should map the stages first so the material and GST trail stays intact end to end.